Like Altoids, Some Small Caps Are 'Curiously Strong'

Well, it looks as if the Fed managed to inspire someone to buy stocks today, despite a rather large pullback shortly after the post-announcement rally on Wednesday. One day doesn't make a trend, but a few days does. The interesting part about the last few strong days is the group of stocks that has emerged as a leader. 

Hopefully my comment at least prompted you to ask 'which stocks?' Glad you asked. We'll be talking about some of them today. But first... 

I'm not going to belabor the point that small and micro cap stocks have an on/off switch, and it's been off for a while. I've also mentioned - in passing - that I'm starting to sense the switch could be flipped 'on' soon. And while I'd love to say "as of right now, yes, small caps are absolutely leading the market higher", I can't...not yet anyway. I can say, however, that small and micro caps have had a much better performance in the last two weeks than their mid and large cap brothers have. 

In other words, much like Altoids candy, some of these small caps are 'curiously strong' now....curious enough for all of us to take notice. Let's look at three of these Altoid-like stocks, and then I want to wrap up with one final thought.
 

	Spicy Pickle

'Business as usual' can be a very good thing, if your usual business is growing a solid revenue machine. Spicy Pickle (OTCBB: SPKL) has turned out to be a great example of how good companies don't have to worry too much about their stock's price as long as they continue to execute the right plan. 

Take today's news as an example. They announced they've signed leases for two new corporate owned restaurants (as opposed to franchisees). That shouldn't come as a shock to anybody, since they announced that was part of the plan back on December 15th. Is the news complicated? No. Is it life-changing? No. Does it show progress? Yes, absolutely. That's my point. 

If you look back closely at the news and follow-up Spicy Pickle has made, what they've done is real simple...they told investors what they're going to do (i.e. total transparency), then they go do it. Brilliant, eh? A lot of other companies could learn the same lesson. 

I truly believe that's why the stock has been able to hold its ground relative to early November's levels. Just for perspective, since November 8th, SPKL is about even. Since the same date, the S&P 500 is down 7.0%. 

The major support line appears to be around $1.10, and was basically established on November 8th. Since then we've seen some modest accumulation days, with very little distribution. That hasn't necessarily helped yet, but I think it hints at the underlying opinion. Consider the environment and the comparative numbers above...if SPKL can hold its ground in a very tough market, I think it could do very well when things are better. 

By the way, the corporate owned stores are desirable for investors because these stores tend to make more money for the company than franchised ones do. 

The franchised units send 7% of their top line sales to Spicy Pickle every week, and the average franchise ends up paying royalties of about $50K per year. The remaining profits are retained by the franchisees. The corporate-owned stores, by comparison, basically get to keep all the profit. The trade-off is involvement - when you own your restaurant, you also have to operate it. When you franchise it, someone else operates it and pays you royalties. 

The full press release appears below.
 

	Applied DNA

I actually blogged this observation on Wednesday, but I thought it was important enough to put it front and center here in the newsletter. 

What's gotten into Applied DNA (OTCBB: APDN) over the last few days? On the 18th, the stock jumped off the 20 day moving average line and hasn't looked back since. It reached 16 cents yesterday, a mere penny shy of matching a multi-week high. You could argue the market-wide rebound was the reason, but APDN started to move before stocks finally made a bottom on the 22nd. 

The odd part is how the rally took shape without any simultaneous news. After a fairly lengthy quiet period, they unleashed a wave of good news in the middle of January. Apparently that was enough to put and keep things in motion for a while...which is a good thing. 

Or, perhaps this is an omen. In my experience I've seen stocks 'predict' news as often as they reflect it. We also know that Applied DNA has been working on a lot of different projects, each of which could bear fruit. (See this page for a synopsis of the company's open projects.) Maybe another piece of fruit is ripe, and that's what the chart's saying.

Anyway, the three key aspects I like best about this chart are... 

1. The buying volume is starting to grow. Tuesday's 370,000 shares is the biggest accumulation day we've seen in a while, and we're starting to see quite a few of them. With the exception of January 23rd, distribution (selling) days are very mild. 
2. APDN is above all of its moving averages...again. I know this is a painfully simple tool, but it's also something that can't be misinterpreted. If you like momentum, moving averages tell you everything you need to know. (If you're a bottom fisher, they tell you nothing.) 
3. The aspect I almost like? APDN is on the verge of new multi-week highs. Technically that level is 17 cents, though 16 cents is significant too. A move to 18 cents I would consider a victory, but also a great breakout move. Yes, that means trade-worthy - at least in my opinion. 

Look for more as things develop. I suspect we'll have news soon. 
 

	Stockgroup

OK, Stockgroup Information Systems (OTCBB: SWEB) isn't one of those small caps that's been 'curiously strong' over the last couple of weeks. However, it was wildly strong on Wednesday, with huge volume to boot. 

The 1.1 million shares we saw trade hands was the highest volume we'd seen in over a year, and the fifth highest volume day ever for the stock. And no catalyst? 

I have to believe that's institutional buying, since most individual investors wouldn't be buying so boldly just three days after a multi-month low (nor would most people be buying when they see SWEB's long-term downtrend). Institutions, on the other hand, have the time and resources to shop for real value. Half of a million dollars worth of the stock was traded. So, somebody - or somebodies - with deep pockets may have been waiting for this stock to really get to a deeply undervalued level. And, I'd say the move from a peak of $1.45 to a low of $0.42 (a 71% pullback) more than qualifies as just that. Picking up on an undervalued stock the rest of the market didn't pick up on, I think they pounced. 

The question to be asking is obvious - what do they know that nobody else does? Hmmm. 

By the way, they made a pretty big announcement this morning about finding a partner in Norway. The wireless financial data service they developed and started promoting about a year ago? Trigcom AS - a big player in the Norwegian BlackBerry/wireless arena - will be promoting that service in Norway. 

I don't have enough room here to get into all the details, but there are two I do want to convey about Trigcom's decision to start selling the MarketStream service. 

One,this may only be one market, but I think this relationship (sharing subscription revenue) can serve as a model for other regions and telecom service providers to do the same. When you start to add the same offer in other countries, all of a sudden you're looking at an annual seven-figure opportunity. 

Second, this is high-margin stuff for Stockgroup. The software platform has already been developed, and Trigcom will be doing most of the marketing work. So, any new revenues should largely go to the bottom line. 

For all the details, click here.
 

	Final Thoughts

As promised above, some final thoughts on these and other curiously strong small caps.... 

Though the Fed has been dovish due to fears of economic slowing, I think at this point a recession is inevitable. Like I said in Saturday's edition though, it's not a reason to freak out. Some stocks actually do well in a slowdown. 

One of the potential beneficiaries of a cooling economy are small cap stocks. These companies tend to nimble and lean - something very important when navigating a tough environment. Still able to perform even when large companies are struggling, investors tend to seek out these relatively protected stocks during a recessionary period. 

Is that what we're seeing now? Maybe. A recession has become a much greater threat in the last two weeks, and the Russell 2000 has started to lead the market (after a very long drought, I might add) as of then. 

Or, maybe the small cap market is rebounding because they've been beaten up so badly for months. 

Or, maybe it's a combination of being undervalued as well as the threat of recession - which happens to be my opinion. 

At this point it doesn't matter, since I don't think we have wildly-conclusive evidence of anything. I did want to put it on the table though, so we can come back and discuss the idea later. If we enter a full-blown recession caution is merited, but I suspect we'll see many small caps start to thrive. I'm actually kind of excited, but I also know of a couple of new companies in the pipeline. More on that later. 

Here's the Spicy Pickle news.
 

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TGR Group, LLC has been paid a fee of $30,000 cash and 1,000,000 shares of newly issued restricted stock by Applied DNA Sciences Inc. for coverage of the Company. 

Larry Isen, the editor and publisher of the OTC Journal, through various entities he controls, has purchased 1,200,441 shares of Spicy Pickle at an average cost of $.2125 per share. These purchases were made in Spicy Pickle private offerings. The aforementioned purchases were made between August of 2005 and August of 2006. On 12/15/07, on entity controlled by Larry Isen participated in an additional financing wherein 12 shares of convertible preferred, converting at $.85 into 120,000 shares and 90,000 warrants with an exercise price of $1.60 were purchased. In addition, Larry Isen has received 785,000 shares of Spicy Pickle common stock for consulting services. In addition, MarketByte LLC, an entity controlled by Larry Isen, has received a fee of $30,000 cash, and 300,000 newly issued restricted shares for coverage of Spicy Pickle. TGR Group LLC, the publisher of the Small Cap Network, has received $30,000 and 300,000 newly issued restricted shares for coverage of Spicy Pickle. Mr. Isen is an affiliate of TGR Group. In addition, two other individuals affiliated with TGR Group have purchased a total of 300,000 shares at $.25 per share and received an additional 70,000 for consulting services. Current positions of the aforementioned can be found at www.otcjournal.com and www.smallcapnetwork.com in the Spicy Pickle information section. 

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